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Analyst: A stock market pullback is 'going to happen at some point.'

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Michelle Connell, CFA and owner of Portia Capital Management joined Yahoo Finance to analyze the latest market trends and where things may head as the summer carries on.

Video Transcript

ADAM SHAPIRO: We invite into the stream Michelle Connell, CFA and owner of Portia Capital Management. It's good to have you here, Michelle. And very simply, does it make sense to you, given the economic climate, that we are hitting, once again, highs on the S&P and on the NASDAQ?

MICHELLE CONNELL: It doesn't have to make sense, right? When we have so much liquidity pervasive throughout the system and it has to have somewhere to go. So it's really hard to fight this melt-up at this particular point. That's something to consider in the short term. But I think in the long term, you still need to be aware of the fundamentals and what you own. And there may be some upside there. But going forward into the fall, there may be some downside, too.

SEANA SMITH: Michelle, when you mentioned some of the downside, we've had some guests come on that say we could be due for a 10% pullback, maybe even a 15% pullback. Is that what you're expecting, or is that a little bit extreme?

MICHELLE CONNELL: I don't think it is extreme because I think it's almost a year since we've had even a 5% pullback. So pullbacks are normal, even though they haven't been normal since the pandemic. I think, on average, you have three to four 10% corrections a year. It's going to happen at some point and I think as people realize that the Fed is going to have to use some sort of tool to handle the inflation that may not go away as quickly as they would like.

ADAM SHAPIRO: When we take a look at these markets going higher, and we're in the middle of earnings season, we have a lot of surprises to the upside on earnings, is this sustainable? Are the companies, perhaps-- they always set us up with lower expectations, but how realistic is it that in the third quarter and fourth quarter, we're going to see these kinds of gains?

MICHELLE CONNELL: Well, when you look at the gains that we've had this year in the S&P, the majority of the upside has been through a multiple appreciation, less so on the profit margin expansion. I think that that's something to watch for is the profit margin decrease because companies do-- they're acquiring or taking on more cost to continue to put goods and services into the economy. And a lot of them, as we've heard the last few days, they're starting to experiment with increasing their prices. Wonder-- if their price increases aren't as readily accepted, those profit margins are going to have less upside.

SEANA SMITH: Michelle, you just mentioned a few minutes ago that inflation may not go away as quickly as the Fed anticipates or as the Fed projects at this point. I guess, can you unpack that just a little bit? How sticky do you think this inflation could potentially be?

MICHELLE CONNELL: I look at two particular areas. I look at home prices and rent, and I think we found out yesterday the average home price is up over 23%. I know in the Dallas-Fort Worth area, our rents are up anywhere from 5% to 10%. On a national basis, you're looking at an average increase on a rent of $200.

And the second part that I think is less-- or excuse me, more sticky-- is the wage side of it. I know that, you know, as an employee, it's really easy to take a raise. I don't think I've ever heard of an employer taking away a raise or a wage.

I actually heard today that in the Dallas-Fort Worth area, there are restaurants that are offering $25 an hour plus a bonus, and they still can't get individuals to come in and wait tables. That may be my new side gig because I did in my prior life. That's pretty tempting there. And I just can't fathom the fact that, you know, we cannot get the employees and workers that we need and we're looking at 50% of small businesses saying they are hurting. They need to raise prices, but they're concerned that those prices may not be digested.

ADAM SHAPIRO: I hope you shared your tips when you were doing that because I was a dishwasher at Danton's Diner in Old Orchard Beach, Maine. So--

MICHELLE CONNELL: I started--

ADAM SHAPIRO: Go ahead.

MICHELLE CONNELL: I started as a busboy. So yes.

ADAM SHAPIRO: Oh wow.

MICHELLE CONNELL: You remember where you came from.

ADAM SHAPIRO: Yes, we do. Real quick, so for your clients, what is the key question they're asking you right now? Can you share that with all of us who want to make decisions about how we invest going forward?

MICHELLE CONNELL: It's probably the same question or concern that investors are discussing or a consumer in the store-- like, yesterday I was in a store in Dallas-Fort Worth, and everybody's talking about the prices. It's inflation. And especially for clients that are close to retirement or in distribution phase, they're really concerned if their portfolio is going to last. Or if it's going to last, is it going to maintain their lifestyle? So those are the calls that I'm getting. They-- of course, they appreciate the melt-up, but is this money going to last? That's the number one call that I'm getting from most of my clients.

SEANA SMITH: Michelle Connell of Portia Capital Management, thanks so much for taking the time to join us today.